Learning Objectives:1.The basics of incremental-cash-flow analysis: identifying the cash flows relevant to a capital-investment decision 2.The construction of a side-by-side discounted-cash-flow analysis for a replacement decision 3.How to adapt the NPV decision rule to a troubled industry 4.The recognition that a reduced investment horizon is a significant consequence of financial distress 5.The importance of sensitivity analysis to a capital-investment decision

Case Questions

1.How has Aurora Textile performed over the past four years? Be prepared to provide financial ratios that present a clear picture of Aurora’s financial condition.

From 1999 through 2002, the financial performance of Aurora was unattractive and disheartening. This could be attributed to the business risks that arose from the intense competition that characterizes the industry in which Aurora operates. Absent an industry benchmark or comparable with which to gauge the performance of Aurora, we utilized a trend analysis of the period 1999 through 2002. With 1999 as a reference point, we noticed that all measures of profitability have worsened. On a cumulative annual basis, net sales have been declining by 15%, while profit margins and ROA were always in the negative (see exhibit 1). While raw material cost as a percentage of net sales have been declining, the cost of conversion is escalating and affecting the bottom-line (see exhibit 1). It is obvious that Aurora needs to manage its expenses to generate profits from sales. While on the surface, the liquidity measures have improved (see exhibit 1), it is doubtful that the company has the ability to meet its current obligations with just cash and cash equivalents on hand. This is partially due to the fact that many of the firm’s current assets are predominantly account receivables and inventories. While it is true that the firm, its competitors, and the industry are continuing to lose money, an effective cost-control strategy – i.e. a strategy that improves profit margins, reduces operating costs, and appropriately manages inventory and account receivables will be crucial for Aurora to remain sustainable.

2.List the factors affecting the textile industry. What do you think is the state of the industry in the United States? How should you incorporate the state of the textile industry into your analysis? Why should anyone invest money in the industry?

3.What are the relevant cash flows for the Zinser investment? Using a 10% WACC and assuming a 36% tax rate, what do you get as the NPV for the project? What are the value drivers in your analysis? What do you estimate as the cost per pound for customer returns under the Zinser alternative? (Hint: for a replacement decision, analysts often find it helpful to prepare two sets of cash flows and two NPVs—one for the status quo and one for the new machine.) Status Quo

In the first year of the project, we calculated net sales assuming the current 500,000 pounds per week production level at a $1.0235 selling price per pound (52-week year). After the first 3 year, we assume sales will grow by 2% in volume and 1% in price. Material and conversion costs will not change, but will increase at a pace of 1%. SG&A costs are equal to 7% of net sales so will adjust accordingly. Change in inventory is cash spent so it should be considered when calculating cash flows. In our analysis we calculated inventory by dividing COGS by the number of days in a year and then multiplying by the number of days of inventory held, 30 days in the status quo scenario. The current equipment will be depreciated using the straight-line method with zero salvage value. The current book value of the machine is $800,000 and the depreciation expense is $200,000 for the next four years. Using these assumptions, keeping all else constant, in a 10-year horizon the NPV of the Hunter Plant is about $8.91...

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...Case20: AuroraTextileCompany
Summary:
In early 2003, Michael, CFO of AuroraTextileCompany, is deciding whether or not to install a new machine called Zinser 351 in order to save the declined sales and increase its competitive force. In deciding whether or not to invest Zinser 351, it is important to get the NPV and the payback period. To get the NPV and the payback period, we firstly need to forecast the future cash flows that the new machine will generate. We found the ten-year NPV to be $3,171,551 based on the FCFs that we forecast. Also, we use the payback period to analyze the acceptance of this project. We found that the discounted payback period is 5.69, which is less than the arbitrary cutoff point of 7.87. Based on our forecast, the company should invest in the Zinser 351 because of the positive NPV and relatively small payback period
Body:
In our analysis, we determined that NPV is the most important factor determining if we should accept or reject the Zinser 351 project. Secondly, we established that the payback period is another contributing force in our decision. The payback period tells us whether we can earn some money in the set period of time but this model has a few drawbacks, such as ignoring timing of cash flows and the positive cash flow after the payback period. In both calculations, NPV and payback period, we...

...Tyson Hilyard, and Tanner Strathman
SUBJ: AuroraTextileCompany
EXECUTIVE SUMMARY
AuroraTextiles has historically been one of the premier textilecompanies in the United States and now has a decision to make. With the opportunity to invest in equipment that could help cure our slumping financials, we must carefully explore whether this investment is appropriate for acompany with such an uncertain future. With that in mind we believe that the Zinser 351 is the perfect investment to pull us out of this slump. As a company that has been able to deliver a premium product for the consumers, the Zinser 351 will allow us to continue to do that while also begin relieving some of the financial stress that we have been under. Our analysis shows that the Zinser 351 project will yield a Net Present Value of $6,474,082.14 million and a discounted payback period of 5.6 years. This project not only brings a big enough payoff as demonstrated by the NPV, but also fits our timeline. The discounted payback period indicates that our investment will be realized before our company is not able to recover from our current financial struggles. The Zinser 351 is a project that this company must undertake if it wants to begin to bring value back to the shareholders who have become more and more impatient with us in recent times....

...﻿Introduction
AuroraTextiles is a textilecompany that specializes in hosiery, knitted outerwear, woven, and industrial and specialty products. They develop finished fabric to meet specific needs as the leading yarn manufacturer established in the 1900s. However, both Aurora and the whole U.S. textile industry have been struggling financially due to globalization and other external factors.Aurora itself may not have responded quickly enough to the deteriorating business environment and has caused their net earnings and concerning ratios leaning toward the negative side. The company needs to either make crucial amends with new investments or stay with its current situation.
Problem #1
How has AuroraTextile performed over the past four years? Be prepared to provide financial ratios that present a clear picture of Aurora’s financial condition.
***Refer to Appendix 1 for financial ratios***
Aurora’s financial performance during 1999 to 2002 was quite discouraging. Aurora has both domestic and international components to its market sales, but 90% of its revenue came from domestic textile market. The top two leading profitable gains were yarn and knitted-outerwear revenue source for Aurora. However, with rising competition all around the world of low production costs as just the start of...

...Introduction
AuroraTextileCompany having over 100 years history has been producing cotton and synthetic/cotton blend yarns to textile industry consisting of U.S. and the international market. The majority of the company’s revenue came from the domestic market and revenue sources for Aurora consist of the hosiery market accounting for 0.43, the knitted-outwear market accounting for 0.35, the wovens market accounting for 0.13, and industrial and specialty products accounting for remaining 0.09 of Aurora’s revenue.
The Term-Mill Industry has been developing through three stages: cotton stage, the industrial revolution stage, and the post industrial revolution stage. In the last stage, the companies operating in U.S. textile industry faced difficulties due to globalization, trade policies, cheaper production costs oversees, and consumer choices. First of all, because of globalization, yarn producers needed to decrease costs using cheaper labor and raw materials in order to survive in competitive market. In the current stage, approximately 150 textile manufacturers had been stopped their operation and Aurora had retained main manufacturing operations by eliminating inefficient operations. Next, the U.S. government had accomplished free-trade policies by signed on two agreements: American Free Trade Agreement (NAFTA) and the Caribbean Basin...

...﻿PART I
Review & study of the past and present situations of the company
Brief Historical Review
1901 John F. Queeny founds the original Monsanto.
He used capital from a soft drink company to start Monsanto.
1920 Monsanto expanded into basic industrial chemicals like sulfuric acid.
1940 It became a leading manufacturer of plastics, including polystyrene, and synthetic fibers.
1970 Monsanto is the leading producer of Agent Orange for US Military operations in Vietnam.
1973 Monsanto began manufacturing the herbicide Roundup, which has been marketed as a "safe", general-purpose herbicide for widespread commercial and consumer use, even though its key ingredient, glyphosate, is a highly toxic poison for animals and humans.
Brief Historical Review
1976: The success of the herbicide Lasso had turned around Monsanto's struggling Agriculture Division, and by the time Agent Orange was banned in the U.S. and Lasso was facing increasing criticism, Monsanto had developed the weedkiller "Roundup”
1983: The first carbonated beverages containing aspartame are sold for public consumption. Diet Coke was sweetened with aspartame after the sweetener became available in the United States.
1996 Monsanto introduces its first biotech crop, Roundup Ready soybeans which tolerate spraying of Roundup herbicide, and biotech BT cotton engineered to resist insect damage
2000 Monsanto merges with Pharmacia and Upjohn, and ceases to exist. Pharmacia forms a new...

...﻿
AuroraTextileCompany Inc Case Study
Finance 450
I. Recommendations
AuroraTextileCompany is currently not in very good financial situation. Based on calculations that I made for the capital budgeting, my recommendation is to buy the new Zinser machine. After computing the NPV for the project it came out to be $10,160,579 over the period of 10 years. According on the analysis of the CFO of the company, Zinser would produce a finer- quality yarn that would be used for higher quality and higher margin products. Since Aurora has been facing so many financial challenges over the years, implementing a new system in place would be a good strategic investment, since their stock price has dropped significantly from $30 to $12. The decision makers of the company need to look at the fact that installing Zinser wouldn’t cost them anything in work force and it is predicted to reduce power and maintenance costs by 0.03 per pound. Based on these assumptions the cost of customer returns will also be higher, which will result in higher profits. With the increasing global competition in mind, Aurora needs to switch to the new Zinser system if they want to remain competitive on the market and keep shareholders confidence.
II. Statement of the Problem
The Chief Financial Officer, Michael Pogonowski needs to decide...

...The Western Company is a public utility holding company which builds and helps to operate electric generating plants across the world. Western is facing increasing competition as the utility industry moves toward deregulation. In the past Western has relied on engineers to make key decisions in the area of capital budgeting selecting projects with the lowest present value of future costs. This is a continuation of the previous case in which the managers are now using the actual company projects to learn new methods of valuation.
1. Caselet 9
a. I do not agree with the decision made by the analyst regarding the natural gas project. Assuming the 4 percent inflation premium holds true, the increase in revenues will outpace the increase in operating costs, resulting in greater profitability. In the analysts figures they used an inflation adjusted rate without adjusting the cash flows for inflation causing an undervaluation of the project.
2. Caselet 10
b. By using the NPV calculation, Western is only using the known information in an all or nothing scenario. While useful in passive investing, such as the bond market, this type of calculation leaves out many factors in the budgeting for projects. By using NPV, the firm is ruling out the active management of projects, and the decisions that can accompany that management. In the management of projects there are always options available: the firm has...